Life happens – so make sure your life insurance keeps up

Life insurance should be a cornerstone of every family’s financial armoury.

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None of us likes to think about dying, but it’s vital to consider what would happen to your family or loved ones should the worst happen.

Having life insurance in place means they will receive a lump sum when you die, easing the financial pressure at a time when they’ll have plenty of other things to worry about.

But once you’ve got your life policy, you need to keep it up to date and fit for purpose. That means reviewing the amount of cover it provides, on a regular basis, so you have the protection you need as and when your circumstances alter.

Here’s what you need to know…

Why you need cover - and when to review it

If you’ve got anyone who is financially dependent on you, you need life insurance to provide for them if you die before they become financial independent.

But it isn’t quite as simple as taking out a policy and leaving it at that.

For example, you might consider increasing the sum insured – the amount the policy will pay out – when children come along, since they are wholly dependent on you for many years.

You’ll also need to take another look at your cover if you change jobs. You might be able to afford higher premiums and increase your insurance. Or, if you’ve had to take on a lower paid job, you might want to reduce your cover and pay lower premiums.

And your employer might provide a chunk of cover related to your annual salary – or it might not.

When the kids have grown up and flown the nest, you’ll need to review your cover again as it’s not worth shelling out for cover if there’s no-one who is financially dependent on you.

Different types of cover

There are two main types of life insurance: term assurance, and whole-of-life insurance.

Term assurance, as the name suggests, will pay out a lump sum if you die within a set number of years – the ‘term’ – which is agreed at the outset.

This type of cover is often taken out alongside a mortgage, so that it will cover the cost of your loan if you die during the mortgage term.

Term assurance can either be level, which means the sum you’re insured for remains the same throughout the policy, or decreasing, which means it reduces over time.

You might choose decreasing cover, for example, if you’re covering a mortgage which will also reduce over time as you pay it off.

Whole-of-life cover offers protection for your lifetime, and therefore premiums are much more expensive than they are for term cover, as it’s inevitable that the policy will pay out at some point.

Consider critical illness cover

You may want to consider taking out critical illness cover in addition to life insurance.

Critical illness cover is a form of insurance which is designed to pay out a tax-free lump sum in the event that you are diagnosed with a specified illness during the term of the policy.

You can either take out standalone cover, or you can usually add it to any life insurance policy.

How much cover?

You might take out life insurance which will cover the exact amount your mortgage is.

But you should also think about the other bills that will need paying if you die.

These include personal loans and credit cards, as well as energy bills and council tax costs.

If one person currently stays at home to look after the children, you also need to think about insurance for them too, as if they were no longer around, the remaining partner would have to fund childcare costs.

Don’t assume that if you’re not earning you don’t need life cover.

If you stay at home looking after the children while your partner works, you’ll need cover to fund childcare costs if you are no longer around.

Before buying cover, remember to factor in any ‘death-in-service’ benefits that your employer might offer. These can be up to four or five times your salary, which could mean you can reduce the amount of cover you take out. 

To make the whole task easy, we’ve built an easy-to-use calculator that will help you tot up how much insurance cover to buy.

Joint or single cover?

If you’ve got financial commitments which you share with someone else, it is more cost-effective to take out a joint life policy rather than two single policies.

The downside of a joint policy is that only one pay-out if made when one of the policyholders dies. The policy finishes at that point, so if you want to remain insured, you’ll need to take out a single policy.

Is your policy in trust?

When you take out life cover, make sure your policy is written in trust. This means that your loved ones will receive the payment directly when you die.

If it isn’t, then it could be subject to inheritance tax (IHT) and your family could be in for a long wait as it goes through the legal process known as probate.

Please note: any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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